Haggling over price delaying India's fighter jet order

By Edd Gent

Published Wednesday, August 12, 2015

India's order of 36 French-made Rafale fighter jets has run into trouble again as government officials struggle to agree sales terms, officials say.

The country is eager to modernise its ageing air force to catch up with regional rivals China and Pakistan, but three years of commercial negotiations with Dassault Aviation for 126 of the Rafale aircraft eventually stalled due to disagreements over assembling most of the aircraft in India.

Prime Minister Narendra Modi intervened to break the logjam, choosing to deal directly with Paris for a smaller order, and on April 10 Modi and French President Francois Hollande announced the government-to-government deal for the sale of the off-the-shelf Rafale fighters, saying officials would work out the details.

However, according to two senior Indian defence officials who spoke to Reuters, both sides are now wrangling over the unit price of the aircraft and a condition that Dassault invest a large percentage of the value of the multi-billion dollar contract in India, threatening to further delay the process.

The key to the dispute is India's insistence on a lower price than the roughly $200m per plane discussed during the commercial talks with Dassault, said the two defence officials, who have been briefed on the new negotiations.

While the previous deal would have seen Dassault assemble 108 of the aircraft in India to boost the country's domestic aerospace sector, the new arrangement doesn't include any local production.

"Since there is no technology transfer, the price that was on the table during the commercial talks cannot stand," said one of the officials, who declined to be identified because he was not authorised to speak to the media.

The Indian Defence Ministry said negotiators were in talks to produce a draft agreement, but declined to give details. A Dassault spokesman declined to comment, as did the French defence procurement agency.

Another issue is New Delhi's standard requirement that arms makers invest a percentage of the value of any deal above $50m in India, according to the two Indian officials.

India is demanding that Dassault invest at least 30 per cent of the contract value in the country by doing things like setting up manufacturing facilities and component supply chains in India for future French operations or providing high-tech job training, the officials said.

"Unless this is waived at the highest levels, the Defence Ministry is proceeding on the basis that offset requirements have to be met," the first official said, adding that France has said it was ready to meet the offset obligations, but that it could push up the deal's cost.

Adding to the problem, as the initial technical specifications were drawn up a decade ago when India began the process of seeking new fighters, the Indian Air Force (IAF) has asked for modifications so the latest weapons could be fitted to the jets, the second defence official said.

A French source familiar with the matter said differing priorities within India were delaying matters. "All along the IAF has asked for more armaments than what Dassault has offered while the Indian administration has demanded offsets," the source said.

The IAF declined to comment, saying the deal was in the government's hands.